The vast majority of those currently approaching retirement don't have enough retirement savings to comfortably retire full time at age 65 and still be able to enjoy the lifestyle afforded by their income. The solutions normally taken are to work beyond the age of 65, learn to live on a much reduced income or a combination of both. Ever noticed how many elderly security guards there are in our country? Or elderly sales persons? These persons have to figure out how to squeeze the most income from possible retirement resources.
Two key decisions we face that have the greatest influence on our eventual retirement income are the age at which we retire and how we retire (do we stop working completely or continue part time). Our decisions on what investments, annuities, CD's, etc also play a significant role in our future retirement income.
Traditionally most individuals rely heavily on company pensions and savings to tide them through retirement. This leads to a reduced lifestyle as company pensions are only a portion of income and drawing down on savings affects the ability to meet any major medical expenses. Too often assets are sold for less than market value simply to meet expenses incurred in retirement.
Some of the common errors in retirement planning are:
- Not planning at all! Sometimes we get so caught up in day to day and month to month planning that we keep putting off that important meeting with a planner to look at securing our financial future.
- Making outdated assumptions. I still meet persons who started annuities a decade or two ago and are still basing their incomes on investment performance from those times even now when the global market struggles to give significant returns in annuities.
- Making decisions based on word of mouth or unrealistic assumptions. At least once a week I would meet a person who did an annuity with a company based on projections that are more than double what they are actually paying or did their financial planning with someone in the industry that is a friend who assured them that what they're saying is true without providing hard facts.
- Retiring too soon. This occurs when individuals do not keep track of the performance of their own portfolio and choose to retire at an age where savings and income cannot sustain the same standard of living.
- Underestimating the cost of healthcare in retirement. Medical bills tend to be a lot higher and insurance a lot more expensive in retirement and many individuals do not take this into consideration in retirement planning. Monthly income cannot cover major medical bills which is why it is necessary to have access to a lump sum of savings.
- Using retirement savings for children's education. I CANNOT STRESS THIS ONE ENOUGH. I always separate these two savings in my clients portfolios because while they are both important planning for one should not mean sacrificing the other.
- Lack of portfolio diversification. Savings in a bank account cannot hedge against inflation. Savings in stocks only cannot secure your capital. It is important to assess both your risk tolerance as well as the options available.
Someone with a well diversified portfolio is securing his financial future a lot more than someone who is depending solely on a company pension and savings.
Then we come to the most difficult group to plan for (in my opinion) - business owners. Several business owners believe that they do not need to plan towards retirement as income from the business would be maintained in retirement. This is assuming, of course, that you can continue to run the business in retirement or that your children would or that whoever takes over after you continues to maintain a successful business or that the economy continues to favour your business. No business is immune to failure and for this reason it is important to plan for your future while the business is successful - have a strong savings, investment, insurance and retirement portfolio.
Annuities - unlike savings that can be drawn down annuities are able to provide INCOME FOR LIFE. I personally have unregistered annuities as I want the option to access my savings prior to retirement but should I not need to access it I can have it converted to a pension when I retire. In this way, I can determine how much is converted to a pension and how much I can keep as a savings accessible for unforeseen expenses. This option is not possible with an annuity registered with BIR as that plan provides a tax break in exchange for being solely for the purpose of a pension. With BIR registered plans, you have the choice of taking up to 25% as a lump sum but at least 75% MUST go towards the purchase of a pension plan. Several times I have met individuals that were sold registered plans when they didn't need it as their company pensions were already meeting the maximum tax break. Always look at the pros and cons of registered vs non registered plans before making a decision.
Here is an illustration of annuity projections (my personal recommendation as it has low fees and strong returns).
Based on these projections it is clear to see why it is important to start planning from a younger age as well as why it is important to make retirement planning a priority.
I know that this has been a lot of information to absorb from one email (even though I kept it brief) so feel free to call me (868-713-9403) if you'd like to meet to discuss further. If you would like to see a projection personal to you then also feel free to email me with your date of birth and monthly contribution.
I look forward to hearing from you. Let's retire secure and happy!
